Board Members & Equity Mentors: What Percent Should You Give?
While some mentors will come and help you out for free, other mentors will be "paid." Usually for startup companies, these kinds of mentorship opportunities are compensated through equity rather than through cash, as most startups don't have all that much cash on hand. If you're working with such mentors, how much equity is a fair share?
==> It Depends on the Type of Business You Run
The type of business you run plays a large role in determining how much equity is a fair share.
If you run a small business, you're probably going to have to give away more equity than if you were operating a business with higher profit potential.
For example, if you want to get someone who owns 50 restaurants to advise you on how to open one restaurant, you'd probably have to give away a significant chunk - Say 5% to 10%.
On the other hand, if you're opening a restaurant chain yourself and are aiming for millions, you could probably give away less.
==> Baselines in a World Without Baselines
As a rule of thumb, board members in startup companies get 1% to 3%, depending on their level of experience and expected involvement in the company.
That said, there really isn't a set rule of thumb with these kinds of agreements. Some mentors will mentor you for free, while others will want 5% or more just to give advice.
It really comes down to what they believe the equity will be worth. If you're aiming to be the next Google and they believe you'll succeed, you may very well get away with less than 1%. On the other hand, if they expect their equity to be worth very little, they'll need more of it to be worth their time.
Usually if you're going to give a mentor, advisor or board member equity in your business, you'll want to have those shares vest over time.
In other words, they should receive their portion of the company over a matter of years. Usually the time period is between three and five years.
That means in order to "earn" their 2% stake, they need to fulfill on their commitment to help take you to the next level over several years' time.
==> What About Free Mentors?
Are there mentors who'll simply give you advice for free? Absolutely. There are many, many people who'll help you simply out of a desire to give back.
That said however, it's unrealistic to hope that you can put together a core team of advisors simply out of good will. If you want to have advisors in all realms of your business, you're going to need an A team that has a vested interest in your business. Giving away equity is one of the best ways to do this.